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Federal Aid Programs Expanded

Federal Aid Programs Expanded

Eligibility for two federal aid programs were significantly expanded last week. Yet, despite Treasury Secretary Mnuchin’s insistence that these expansions were targeted at small- to medium-sized oil and gas companies, it remains unlikely that stripper well producers will be able to participate in either program.

First, the Federal Reserve simultaneously expanded its Main Street program to companies with more than 10,000 employees and $2.5 billion in revenue and lowered its minimum loan amount to $500,000. Program funds now can be used to refinance and make payments on existing debt, and applicants will no longer have to prove that they were in “good standing” prior to March 2020. The Fed also created a third tranche of loans for companies with higher debtloads—but on those loans, the banks originating them must hold 15% of the loan (rather than the 5% for other tranches) on its books.

Second, Secretary Mnuchin also proposed a bridge loan program for oil and gas companies, and, although details of the program have not been released, it appears that the program will involve the asset manager BlackRock purchasing corporate bonds from struggling companies.

Where do these changes leave stripper well producers? As proposed, the Treasury’s bridge loan program will do absolutely nothing for them, as they cannot issue corporate debt. While some of the changes to the Fed’s Main Street program may benefit heavily leveraged oil and gas companies, its expansion to include companies with more than 10,000 employees will also do absolutely nothing for stripper well producers. It’s also unclear whether banks will be interested in making, or stripper well producers in receiving, loans of $500,000 or greater; unlike the Paycheck Protection Program, these loans will have to be paid back.

For the time being at least, the Paycheck Protection Program remains the best-suited relief program for stripper well producers.

Senate Democrats Target Small Business Tax Relief

The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act included a provision restoring passthrough business’s ability to carryback net operating losses (NOLs). Under the Tax Cuts and Jobs Act, carrybacks were not allowed; NOLs could be carried forward indefinitely but were limited to 80% of taxable income.

The CARES Act temporarily suspended that prohibition. Under the relief package, NOLs generated in tax years 2018, 2019, and 2020 can be carried back five years and carried forward with no limitation. This provision was intended to give passthrough businesses additional liquidity to cover salaries and other expenses during the national emergency.

Senators Tom Carper (D-DE) and Chris Coons (D-DE) along with other Senate Democrat have unveiled legislation to repeal these changes for passthrough business. They argue that they are nothing more than handouts to millionaires, which dwarf the payments to most Americans capped at $1200.

Based off an analysis from the Tax Policy Center, the Delaware Senators instead propose limiting NOL carrybacks to small businesses (defined by gross receipts), permit them only for the tax year 2020, and limit the carryback to 2018 and 2019 only. They also propose restoring the excess business loss limitations which would limit NOL carrybacks to no more than $250,000 for individuals and $500,000 for joint filers.